Thoughts on Software, Technology, and Startups

Through Hirelite, cofounders often ask me how much equity a technical cofounder should get. The graphic below balances the risks cofounders take with their relative contributions to help answer this question. All assumptions and clarifications are noted after the graphic.

This covers one of the most common situations I encounter: For a pre-funding web startup whose team includes only a non-technical cofounder, how much equity should an incoming technical cofounder get?

Technical cofounders, remember that the number of shares or options doesn't matter, just your percentage ownership (what the chart shows).

Assumptions

For this case, I assume the non-technical cofounder has already contributed significantly to the business and will likely get more equity (in this chart their minimum ownership is 50%). This doesn't have to be the case. Technically inclined people can definitely build something on their own, and then seek a non-technical cofounder, retaining more equity for themselves. Even if the technical cofounder doesn't prototype something first, they can still contribute more to the business and receive more equity (ex: someone who did marketing for 2 years out of undergrad manages to recruit a top 10th percentile programmer with a successful app in the iPhone app store).

I assume both the non-technical and the technical cofounders are compensated equally. I also assume they are either working on their company full time now or will be soon. Compensation is probably between $0 and a ramen salary. This is an area that varies widely and can significantly impact how much equity a technical cofounder receives (if they take more salary). It's beyond the scope of this post, but I'll try to cover it in the future.

I assume the technical cofounder has a reasonably general set of technical skills and can pickup new technical skills quickly. Ex: they're primarily a back-end programmer, who can code basic front-end specs, and who can administer cloud hosting.

I assume both cofounders will be diluted equally as more employees and investors get involved.

Finally, I assume this chart may be a little surprising to non-technical cofounders. Why should a technical cofounder get so much of the company? Especially a company based on your vision. Basically, it's because ideas aren't worth much. Execution is what matters, and in most web startups that falls on the technical founder. Software developers are a hot commodity right now, and many of them know it, so they're on the lookout for really stellar business people to partner with, not some run-of-the-mill, me-too idea having, 10k foot synergizer without any concrete sales prospects, marketing ability, or product experience. Sorry for the rant, but in all seriousness, I've seen too many good non-technical founders delay building a product for months because they're too stingy with equity.

Other Reading

Here are a few other approaches by others in the venture and tech community. There are no hard rules for this kind of stuff, so I'd recommend reading them and synthesizing with this:

[1] Technical cofounder starts with 50%: start by assuming the technical and non-technical cofounders will contribute similarly to the business and are taking similar risks for the business. Give the non-technical cofounder extra equity for anything "above and beyond" (see final assumption above for more). Also, here's an example calculation: 50 (base equity) - 10 (for working prototype) - 5 (has over 10k users) - 10 (has raised VC) = 25. The technical cofounder gets 25% of the company.

[2] Working prototype (not just wireframes) -10%: If a non-technical cofounder has a working prototype, they've likely assumed some risk already to build the prototype (perhaps by contracting it out). Creating wireframes doesn't require much risk taking or even really help de-risk much of the busines.

[2a] Has paying customers -10%: If the company already has paying customers, the non-technical cofounder has already eliminated a huge risk for the business; someone wants the product.

[2b] Has over 10k users -5%: If the company doesn't have paying customers, but does have some reasonable user traction (with an nice trajectory), the non-technical cofounder has de-risked the business some, but not as much as having paying customers.

[3] Non-technical cofounder has significant connections or experience -10%: Connections include: relationships with key people in the company's target market, social network connections, blog readership, etc. Domain specific experience within the target market are helpful as are more broad experiences in sales, marketing, product development, or business development (probably on the order of 5+ years outside of undergrad, grad, or MBA school).

[4] Non-technical cofounder has raised venture capital before -10%: The non-technical cofounder has done a startup before, and someone has trusted them with a lot of money. It will probably be easier to get money again. If your business doesn't need external capital, tone this number down, but it's still important (maybe -5%) because it conveys a degree of startup savvy.

[5] Non-technical cofounder has had a successful exit before -10%: The biggest predictor of future success is past performance. This could also apply to non-exit situations where the non-technical cofounder started a company that is operating successfully and the non-technical cofounder has chosen to move on, etc.

[6a] Salary upon funding -0%: No extra equity for getting a salary upon funding. It may not be a market salary, but a technical founder will likely get something if they elect to. Why should a technical cofounder take less equity upfront because they may or may not receive a salary later? In this situation a technical cofounder and a non-technical cofounder are taking similar risks; therefore, neither get any extra equity.

[6b] Non-technical cofounder has idea and vision -0%: This is just part of the job description and included in the non-technical cofounder's initial 50%. Execution is what matters anyway (see final assumption above for more).

[6c] Non-technical cofounder has MBA -0%: (this is my opinion) In the early days of a startup, an MBA doesn't help much. It certainly doesn't hurt, but it shouldn't affect equity.

[7] Non-technical cofounder invests money -5% per $10k: This is an approximation based on a very early stage valuation of $200k. The situation will vary from company to company based on who is involved with the company and what they've accomplished so far. When I think about this, I only include money still unspent when the technical cofounder joins (usually the money was used to build the initial prototype. Sometimes I adjust the equity for the "working prototype" step above).

[8] Lower limit 10%: A non-technical cofounder wants to ensure the technical cofounder has compelling incentives. I consider this the minimum if the technical cofounder is not taking a salary.

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39 responses

Hm, I'd say the technical cofounder should start with 100%. He's the guy designing and building the product. You don't need funding to be successful. With $100 you can establish a website and start selling direct to consumers. With free time and a little bit of smarts you can figure out how to market. Maybe you only make $500 the first month. But keep it up and the second month you make $1000. Soon you are clearing 7 figures. The guy who builds the product doesn't need the other guys. Why are they there except to be parasites anyway? I am now pulling in 8 figures. After a decade in business and hiring a dozen non-technical folks to do basic business tasks for standard office work rates, I finally hired another engineer to help me. Him I pay in the mid 6 figures and its worth it. There are lots of guys that can do great sales and marketing and they are not hard to find. Finding someone who can build a quality product is the hard part.

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Scott

@Scott, thanks for your comment and congrats on your success.

I agree that if it's a technical person starting out on their own, they should start with 100% equity. However, this chart is for the scenario when a non-technical person has been working on the initial business and then wants to bring a technical person onboard (likely after there is some traction).

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Nathan Hurst

@Nathan -- does your chart take into account what would (likely) happen to the business without a technical co-founder? I propose that this is the actual value of the technical co-founder and as such this should be taken into account

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Mircea

@Mircea that's a great point. Without a technical cofounder, tech-heavy businesses will likely fail in the long run (especially if you try to contract out/outsource the work for too long).

I try to take that into account in the chart. Though building the product is a lot of hard work, most businesses don't fail because they can't get anything built. They fail because they either don't have customers, don't have attention, or built the wrong thing (and the non-technical cofounder often deals with this part as the technical cofounder builds the product).

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Nathan Hurst

A single tech founder needs to learn all the biz stuff. Plus, she also needs to spend time doing all that biz stuff, which sometimes is a good thing since it moves away attention for new features that might not be necessary at the beginning.

The greatest advantage in having a co-founder is the complementarity. Both kind of contributions (coding the product, and relations&biz expertise) are equally important as long as they are done with professionalism.

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Cristian Pascu

I want to suggest that Scott's comment reflects a bit of bias. As non-technical founders (two of us), we have found both sides of the spectrum. I've had some engineers and programmers caution me that "good programmers are a dime a dozen," and I've heard others say you should never offer a technical co-founder less than an equal stake because "without us you're just a bunch of ideas." Of course the truth lies somewhere in the middle. We've worked with one technical co-founder (it didn't work out) who was a brilliant young programmer, and, relatively speaking, a dunce in discussing most business issues. Obviously good businessmen are not just out there growing on trees, as Scott suggests.

I think Nathan's post is right on. One thing that would have been helpful for us is just to see how this breaks down when there are more than two co-founders in the mix. I interpret the 50% starting point here to mean "equal share", as I certainly would not offer 50% to a newcomer while my partner and I split the other half after 10 months of work.

In any case, thanks for the GREAT post!

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Andrew

@Nathan - thank you for this post. I believe it hits the mark 100%.

Programmers always say ideas are a dime a dozen, what would happen to the company without them, and anyone can do sales and marketing.

However the truth of the matter is without the Architects (Non Tech Co-Founders) startup 'idea' most of you guys would still be freelancers for other companies with no real business of your own. As for what would happen to the company without you, well we would just take the profits from the prototype we had built the first time and pay someone to fix it. And lastly the same literal focus that makes you such a great coder is also the one thing that stops you from being a great sales and marketing visionary.

Without Architects (Non Tech Co-Founder) you guys wouldn't even know the direction to code in. You wouldn't know how code virality, or if your customer even wants the features your giving them, and you wouldn't even know how to bring the customers to you to buy what you made.

So next time you think about putting down an Architect you think about this.

Respect is a 2 way street.

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James

@James thanks for your comment. I have a few problems with it though. I do think ideas are a dime a dozen, but you are right that sales and marketing take real skill and effort.

I have a problem with this part of your comment, "However the truth of the matter is without the Architects (Non Tech Co-Founders) startup 'idea' most of you guys would still be freelancers for other companies with no real business of your own." The best non-technical founders I know think of their technical cofounders as complete partners, not just engineering monkeys that just build things. They know that developers could create a company on their own (at least initially) and are essentially giving up 50% or more to add sales, marketing, etc skills to the team.

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Nathan Hurst

Great post, Nathan!

I'm actually looking for an equty technical cofounder now for some web projects I have in mind.

I consider myself a non-technical (architect) person, but I do have a very good understanding on programming/website logic/etc so I can definitely relate to what it takes to build a website I just don't have the knowlege to create advanced/professional looking sites.

I agree with James it's definitely a 2 way street when finding a technical cofounder or any type of business partner you want to work with.

The issue I've been having lately with trying to find a techincal cofounder is either they really don't have the programming skills to successfully build one of my website projects, or they don't have the true entrepreneurial spirit.

Some technical people that I've talked to want equity but also want to get paid; whatever happened to good old "sweat equity"? If I could afford to pay a technical partner I would definitely go for that option and give them a much smaller portion of equity depending on how much I would pay them.

But I'm looking for a technical partner who is in it for the long run; I'm not looking to profit overnight from any of my web projects. I'm willing to work 24/7 and put as much "sweat equity" into these projects to see them succeed...that's my main goal, and I don't want to worry about a technical partner who is looking at this for the short term and worried about getting paid now.

I have no problem going into a 50/50 partnership with a technical cofounder if they are as driven to succeed as I am, and looks at these web projects as investments to future equity profits that will out way any payments I give him today.

Of course, there is risk in developing any website project but I think it's worth taking that risk then not trying at all. I believe you just have to keep throwing darts until you finally hit that bullseye. And the great thing about websites projects is you really don't have to risk that much compared to brick-and-mortar businesses; maybe just your free time. I have a full-time job which still gives me an opportunity to work on my side projects and I can still balance both just fine.

If I could do it all over again I would have majored in programming, but since this is no longer an option I'm willing to partner up with a technical cofounder who has the dedication, entrepreneurial spirit, and is willing to risk their free time to work on web projects that could one day payoff greatly for both of us.

Bernie

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Bernie

I'm in the situation of having a cofounder besides myself, both of us are "non-technical" in the sense that we don't do back-end programming, although both of us do front end development. We hired a backend developer a few months ago and want to bring him on with an equity agreement, which he's interested in. If both my cofounder and I split equity 50/50, and we have no funding, and we're dependent on our developer, how much equity should we offer?

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Chris Beaman

@Bernie - Consider taking things slower with potential co-founders. Get to know each other while you work on a small portion of the project together. As you work together, hopefully they'll feel more invested in the business and the problem you're solving.

@Chris - My first reaction is: Give the person 1/3 of the company - especially if you're not paying the person. You want this person to be a partner it sounds like (and you want to keep them - developers are in high demand right now). I can give you a better suggestion based on you and your current co-founder's experience and startup traction. Feel free to email me at nathan@hirelite.com if you prefer not to tell the world.

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Nathan Hurst

Great post tackling a complex issue, thanks Nathan

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magicwebco

Hi Nathan,Thanks for this post.I'm in a middle of a huge conflict discussing this exact issue.Are there any references out there that could support your point of view?That would help me very much.Thanks in advance.

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Leo S

@magicwebco - Thanks!

@Leo - I just added a few additional sources. They calculate equity splits in different ways, but are based on similar principles.

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Nathan Hurst

Thanks Nathan for the references they have been a great help!

One more question regarding non-technical founder has MBA from MIT, do you think he should be getting more equity just because of the MIT brand?If so please share some examples for this case.

Thanks a million ;)

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Leo S

@Leo - I'm of the opinion that MBA's are neutral for startups. They don't help or hurt. I wouldn't offer extra equity because of it.

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Nathan Hurst

Hey Nathan,

Great post! I definitely learned a lot, but I'm in a bit of a different situation - I was wondering what you think my technical guy should receive.

So me and my other friend (both non-technical) hired a web development/design team to build a site based off of our idea. We do not have anyone technical on the team yet, but I know that once we launch, I will need someone technical to adjust/maintain/improve the website (possibly even change it completely if something shifts). Me and my buddy have put all the money for the project, and can get VC funding too -

1) roughly speaking, what is the range of % that you think this technical co-founder should receive? 2) Is he even considered a co-founder if the project is already complete by the time he joins (albeit, it is a bootstrapped version that will need improvement)? 3) Also, I'm not sure if he is the most qualified for "CTO" - what if I hire someone along the way that proves to be better? should I just not label anyone as "CTO" until I get 3-4 coders and figure out which one is the best? not sure how to give equity for that situation either..

Any advice would be extremely helpful - i'm 3 weeks away from launching a platform similar to AirBnB (for another space tho), and I just wanted to clarify this before everything started.

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daigo kurosaki

@daigo - the biggest thing you need to decide is if you want a technical cofounder or not. Do you want a partner or an employee? It will depend on your business what makes more sense. What does your company do? For example, if you were building Kayak, you'd probably need a partner because the business is fairly tech heavy (tough integrations, big data concerns, search, etc). If you were starting a purely content or community site, you might be able to get by with a lead developer especially if you have had experience managing technical projects.

I'm going to assume you're in a tech heavy business for now.

Is the site you had built launched yet? If it is and you've got 500+ people signed up, you've demonstrated that you've solving a problem people care about. This takes away a lot of risk, and you'll be able to hold on to more equity. Since there are 2 of you already, you might be able to offer 15-20%.

If the site is not launched, you should probably be offering closer to 25-30% because there is still a lot of risk from a product, user acquisition, and market standpoint.

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Nathan Hurst

Excellent article ! I find your blog by searching "How Much Equity Tech Cofounder" in Google. I fully agree with your way of sharing equities. The non-tech co-founder bringing the business idea (or Business plan) should offer from 20 to 49% of the equity of the future startup to the tech co-founder. For a regular e-commerce web site, the lowest percentage, and if the products, services and offers need to invent or need continuous development, adaptation and innovation, it's 49%! The 1% difference in a nearly 50/50 equity sharing will not make one (the CEO) richer than the other one (the CTO), but it will secure the governance of the start-up to the CEO.

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arimassoudi

Very insightful post.

My scenario is complex. I'm a non technical founder that has worked eight months on a project. It involves several database integrations and big data. I' ve secured the database/API licensing for the content and the strategy is well thought through. I've also successfully found $300,000 for an Internet startup previous.

The dilemma that the most qualified technology candidates only want to work part time. The project could be developed with two part time technologists. What equity is scenario would be appropriate. Keeping in mind that I'll also require an co-founder from the medical community.

Your feedback is appreciated.

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Commodore

@Commodore - the thing to watch out for with part-time people is that sometimes they get interested in something else. Perhaps you could set up a vesting schedule to minimize your downside if they do. You could also do a partial grant with the rest of it coming (or vesting accellerating) when they become full time.

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Nathan Hurst

Great post, I found this extremely helpful but do have a somewhat unique scenario and would love any feedback.

We currently have 3 co-founders, CEO came up with the idea and brought the team together and puts a small amount of ~$2k a month to the CTO to help supplement income while he freelances. No one is 100% fulltime yet but the CTO puts in the most time ~40 hours a week with the CEO and COO putting in about 20 hours per week.

We are pre-funding but have a working beta stage product...how much equity is fair for the CTO based on that in your opinion?

I have the original idea and I have done building my product which includes iOS and Android app, a website, backend web service server setup, database setup and web server setup as well and all by myself.

However, there are only 100+ users and a few paid customers.

Now I need to get a co-founder on board and I found one. How much equity do you think I should give him?

Your chart only specify for non-technical co founder.

if based on your chart, I should give him 30% stake ( -10% < working prototype and -10% paying customers)

regards,Mark Thien

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Mark Thien

one more things is I have not gotten anything funding yet and my startup is just about 3 months old.

The technical co-founder is not getting any funding in as well.

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Mark Thien

I hate to say "it depends," but it really depends. Primarily on your respective levels of commitment and the other skills, relationships and assets you bring to the table. Ideas alone are relatively cheap; execution is key, and access to capital, marketing and distribution channels are all important.

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glocalrpo.com

Interesting post, although I'm surprised to hear anyone say that 'Sales and marketing' are a dime a dozen. There are no shortage of good programmers out there, and unless you're looking to build the next big thing and disrupt a market where you need true cutting edge tech, it shouldn't be given the most importance. Plus, programmers won't have the years of business experience or know the intricacies of building and running a business.
And unless you do have the next big idea, which time has come and will grow on it's own as long as the right tech team can build it (Ex: Facebook), it's not a valid argument to make.
For everybody else, the "Marketing" of the business, IS the business. The true marketing greats will tell you this. A great idea will only take you so far, and like Branson said; Opportunities are like buses, there's always another one coming along. Without seasoned sales and marketing skills, the masses will hear about these ideas, no matter how good or great they are...

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Brett Fogle

@James
Did you forget that programmers are human beings with brain as well ? lol. Who says that you don't or can't have ideas, marketting, sales skills etc once you become a programmer. Have you forgotten that programmers are samrt human beings with problem solving skills in the first place ? most tech startups that are successfull today are ideas of computer programmers i.e. take facebook as an example. Apparently Facebbook founder stole the idea of facebook but that goes to show you that programmers can run with anything by themselves if the fact that they are programmers doesn't convince you enough. Don't forget that a programmer is a regular person with programming skills. I can't believe that you said, "Without Architects (Non Tech Co-Founder) you guys wouldn't even know the direction to code in. You wouldn't know how code virality, or if your customer even wants the features your giving them, and you wouldn't even know how to bring the customers to you to buy what you made". You said it as if, you can't have any other skill set once you have become a programmer. (excuse all typos)

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Ayo

Hi,
I am confused about how much equity I should give to my partners and I would love to hear about your feedbacks.
I am a non tech founder that has a business idea (collaborative work market place), made the business plan, brought the team together, invested a little bit of money for the server, domain, brand protection, logo, …
I am also dealing with potential partners, investors, and everything that is related to the good development of this startup.
I have a technical partner that is basically creating the market place based on my ideas, he invests the free time he has on the side of his job and personal life. We are launching the beta version in September and he will be with me on the long term.
I am also planning to collaborate with a community managers and a traffic acquisition manager and the idea is to give them equity to get them on board.
As mentioned above I am not sure about how much equity it would be appropriate to give to the person that is creating the market and will maintain it and optimize it over time.
Thanks in advance for your time,
Stan,

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Stan

In a similar situation. I m a non tech and has established a business already having customers bringing in 4 figure revenue but what's limiting for the expansion of business is an android platform/ app.
I found a programmer who wanted to charge me for the app but after explaining the idea to him, he was interested in a partnership but suggested I should finance close to 50% of the app initial costs to compensate his time and risk.
He then demanded 50% equity because he is going to add a web site and another app for content management. He will bring in someone for digital marketing u dear his share.
Is that a fair deal?